UNIVERSITI UTARA MALAYSIA

SEMESTER A182 SESSION 2018/2019

BEEQ2013
MATHEMATICAL ECONOMICS

GROUP ASSIGNMENT 1

LECTURER NAME
MOHD FAISOL B MD SALLEH

GROUP D

(GROUP 6)

STUDENTS NAME
NO NAME NO.MATRICS
.
1 ONG WEI XING 261581
2 MUHAMMAD ALIFF HAIKAL BIN ADNAN 261848
3 WANG ROU 262750
4 NOR AMIRA BINTI MAT JUSOH 264618

SUBMITTED DATE
28 MARCH 2019
 Contents

Topic Page
A171 2-4
 QUESTION ONE
-a)
-b)
 QUESTION TWO
-a)
-b)
-c)
 QUESTION THREE
1.0 Static (Equilibrium) Analysis -a)
A172 11
 QUESTION ONE
-a)
-b)
A181 18-19
 QUESTION ONE
-** Expression is faulty
**)
-ii)
-iii)
-iv)
A171 5-7
 QUESTION THREE
-b)
2.0 Application of Matrix Algebra in A172 11-14
Economics  QUESTION ONE
-c)
-d)
 QUESTION TWO
-a)
A171 7-10
 QUESTION FOUR
-a)** Expression is faulty
**)** Expression is
faulty **)
3.0 Comparative Static Analysis  QUESTION FIVE
- a)** Expression is
faulty **)** Expression
is faulty **)
-b) ** Expression is
faulty **)** Expression
is faulty **)
A172 15-17
 QUESTION TWO
-b) ** Expression is
faulty **)** Expression
1
 is faulty **)
-c) ** Expression is
faulty **)** Expression
is faulty **)**
Expression is faulty **)*
* Expression is faulty **)
** Expression is faulty
**)
A181 17-21
 QUESTION ONE
-** Expression is faulty
**)** Expression is
faulty **)** Expression
is faulty **)**
Expression is faulty **)*
* Expression is faulty **)
** Expression is faulty
**)** Expression is
faulty **)** Expression
is faulty **)

QUESTION ONE (10 MARKS) BEEQ2013 A171

Given the supply and demand functions

S(Q , P)= Q 2 + 14Q + 22 -P = O and D(Q , P)= -Q 2 - 10Q + 150 -P = O,

where P = Price (in RM); Q Quantity (in a thousand).

a) Calculate the equilibrium price and quantity. (5

marks)
S=D
Q2+14Q+22-P = -Q2-10Q+150-P
2Q2+24Q-128 = 0
2(Q2+12Q-64) = 0
(Q-4) (Q+16) = 0
Q* = 4 , Q* = -16 (rejected)
Take Q* = 4
P* = 42+14(4) +22
= 94

2
 The equilibrium price is RM 94 and equilibrium quantity is 4 000 units.
b) Which curve will move when the price of the substitute goods falls?
State the direction of the movement of the curve as well as state its effect
on the equilibrium price and quantity. (5
marks)
The demand curve will shift leftward to demand curve, D* when the
price of substitute good falls. The equilibrium price will decrease and the
equilibrium quantity decrease. The equilibrium price of good will fall
from P0to P1 and the equilibrium quantity of good will fall from Q 0 to Q 1
.The new equilibrium is E1.

8000
6000
Quantity

4000 Demand curve,D

Supply Curve,S
2000
Demand curve,D *
0
60 70 80 90 100 110 120 130
Price (RM)

QUESTION TWO (11 MARKS) BEEQ2013 A171

Given a national income model as follows:

Y = C + 10 + Go, C = Co + bYd and T = To+ tY,

where Y = income; Yd disposable income; C consumption; Co autonomous

consumption; Io = autonomous investment; Go = autonomous government
expenditure; T Tax; To = autonomous tax; b and t are coefficients.

a) Identify endogenous, exogenous variables, and parameters in the system

of equations. (3
marks)
Endogenous = Y, C, T

Exogenous =Co, Io, Go, To

Parameter = b, t

3
 b) Find the equation for the equilibrium level of income in the reduced
form.

(5
marks)

Y = C+ Io+Go

= Co + b(Y-T) + Io+Go

= Co + b[Y-( To+ tY)] + Io+Go

= Co + bY-bTo- btY+ Io+Go

Y-bY+btY = Co-bTo +Io+Go

Y(1-b+bt) = Co-bTo +Io+Go

C 0 -bT 0 +I 0 +G0
Y* = 1-b+bt

c) Calculate the equilibrium level of income where Co = 200; b = 0.8; T o =

40, t = 0.25; Io = 250; Go = 300. (3
marks)
Y = [(200) - (0.8)(40) + 250+300] / [1-(0.8)+(0.8)(0.25)]
718
= 0.4
= 1795
The equilibrium level of income is RM 1795.00

QUESTION THREE (13 MARKS) BEEQ2013 A171

a) Given the following set of simultaneous equations for two related markets;

Qdx= 410-5Px -2Py and Qsx = - 60 + 3Px

Qdy = 295 -Px - 3Py and Qsy = - 120 +2Py,
where; Qdx and Qsx are demand and supply for goods x in a thousand.
Qdy and Qsy are demand and supply for goods y in a thousand; P x and Py
are price for commodity x and y in Ringgit Malaysia (RM).

Find the equilibrium price and quantity by matrix inversion technique.

(6 marks)

4
 Qdx = Qsx Qdy = Qsy
410-5Px -2Py = - 60 + 3Px 295-Px-3Py = - 120 +2Py
8Px+2Py = 470 Px+5Py = 415
8Px+2Py = 470
Px+5Py = 415
Ax=d

[ 81 25 ] [ PP ] = [ 470
x

y 415 ]

x = A−1 d

Px 1
[ ]
P y = [(8)(5)−(2)(1)] [−15 −28 ] [ 470
415 ]

Px 1
1520
[ ] [ ]
P y = 38 2850

Px 40
[ ][ ]
Py
=
75

Px = 40, Py = 75
Qx = -60+3(40), Qy = -120+2(75)
= 60 = 30
Hence the equilibrium price for P x is RM 40 while Py is RM 75; the
equilibrium
quantity for Qx is 60 000 units while Qy is 30 000 units.

5
b) Given the coefficient matrix (A), and the final demand vector (d) of a
hypothetical economy, respectively, as

0.3 0.4 0.1 20

[ ] []
A= 0.5 0.2 0.6 and d= 10 ,
0.1 0.3 0.1 30

determine the level of output for the economy. (7 marks)

Leontief matrix T = I – A

1 0 0 0.3 0.4 0.1

[ ][
T = 0 1 0 − 0.5 0.2 0.6
0 0 1 0.1 0.3 0.1 ]
0.7 −0.4 −0.1

[
T = −0.5 0.8 −0.6
−0.1 −0.3 0.9 ]
TX=d

x1

][ ] []
0.7 −0.4 −0.1 20

[ −0.5 0.8 −0.6

−0.1 −0.3 0.9
x2 ¿
xalignl¿ 3 ¿ ¿
=
10
30

|T|= 0.7[(0.8)(0.9) - (-0.3)(-0.6)] + (-0.4)[(-0.5)(0.9) – (-0.1)(-0.6)]

- (-0.1)[(-0.5)(-0.3) – (-0.1)(0.8)]

= 0.7(0.54) + 0.4(-0.51) -0.1(0.23)

= 0.151

6
 20 −0.4 −0.1
[
[ T 1 ]= 10 0.8 −0.6
30 −0.3 0.9 ]
|T 1|= 20[(0.8)(0.9) – (-0.3)(-0.6)] + (-0.4)[(10)(0.9) – (30)(-0.6)]

- (-0.1)[(10)(-0.3) – (30)(0.8)]

= 20(0.54) + 0.4(27) -0.1(-27)

= 24.3

|T |
x 1= 1
|T|

24 .3
= 0. 151
= 160.93

0 .7 20 −0.1

[
[ T 2]= −0 .5 10 −0.6
−0 .1 30 0.9 ]
|T |=
2 0.7[(10)(0.9) – (30)(-0.6)] + (20)[(-0.5)(0.9) – (-0.1)(-0.6)]
- (-0.1)[(-0.5)(30) – (-0.1)(10)]
= 0.7(27) + 20(-0.51) – 0.1(-14)
= 30.5
|T 2|
x 2=
|T|
30 .5
= 0. 151
= 201.99

7
 0.7 −0.4 20
[
[ T 3 ]= −0 .5 0 .8 10
−0 .1 −0.3 30 ]
|T 3|= 0.7 [(0.8)(30) – (-0.3)(10)] + (-0.4)[(-0.5)(30) – (-0.1)(10)]
- (20)[(-0.5)(-0.3) – (-0.8)(-0.1)]
= 0.7(27) + 0.4(-14) – 20(0.23)
= 17.9
|T 3|
x 3=
|T|
17 .9
= 0. 151
= 118.54

QUESTION FOUR (15 MARKS) BEEQ2013 A171

a) Find the total derivative of the following functions:
2
x . y +1
z=
i) y with respect to t, given x = t, y = 2 t (3
marks)
2 2 2
∂ z ( y )(2 xy )−(x y +1 ) ∂ z ( y )( x )−( x y +1)(1 )
= =
∂x y2 ∂y y2
= 2x −1
2
= y

dz ∂ z dx ∂ z dy
= ( ) ( )+
dt ∂ x dt ∂ y dt
1
2x (1)+(− 2 )(2 )
= y
2
2x− 2
= y
since x = t, y = 2 t
2
2t−
= (2 t )2
1
2t− 2
= 2t

8
 ii) ln (x2 + y 2 ¿ )−1=0 ; y> 0 ¿ (2 marks)
F(x,y)=ln (x2 + y 2 ¿ )−1 ¿
1 1
Fx= (2 x ) F y= (2 y )
( x + y2 )
2
( x + y2)
2

2x 2y
2 2 22
= (x +y ) = (x +y )
dy −F x
=
dx F y
2x
−
−F x ( x + y2 )
2
=
Fy 2y
(x + y 2 )
2

x
−
= y

QUESTION FIVE (BEEQ 2013 A171)

a) Given model of a process of money supply in an economy

cu+ 1
M= [ F+ G+ d
cu+ x H (i−i )] )) where cu is the currency deposit ratio i.e

currency required reserve

cu= , x is required reserve ratio i.e x= , F denotes net
deposit deposit
foreign assets, G, net government borrowing, H, deposit net borrowing by commercial
banks, i is market interest rate, and id is the central bank’s discount rate.

9
 cu+1
i. State and explain the economic meaning of the term cu+ x (4

cu+1
marks) The term cu+ x is money multiplier formula when there is
currency deposit ratio.

Change∈total money supply

Money Multiplier= . The money
Change∈monetary base (reserveS )
multiplier refers to how an initial deposit can lead to a bigger final
increase in the total money supply. When $1 increase in the monetary
base, money supply increases by $1.
ii. Derive the effects of the central bank's policy instruments, in particular, if
the required reserve ratio is increased, on money supply. (5 marks)
cu+1
M= [ F+G+ H (i−i d )]
cu+x
∂ M [( cu+ x )( 0)−( cu+1 )(1) ] cu+1
∂x
=
[ ( cu+ x )
2 ][
[ F+ G+ H (i −i d )] + (0)
cu+ x ( )]
−cu−1
= 2
[ F +G+ H (i−i d )]
(cu+ x )

b) Consider the simple demand and supply of a particular commodity as follows:

QD = D(P, Y), DP < 0 , DY > O

QS = S(P, R), SP > 0, SR < O

where Q, P, Y, R are respectively, quantity demanded, quantity supplied, price,

income, and the price of a resource, say oil, used in the production of the good.

i) Express the demand and the supply equations above in their implicit version.

(2 marks)

F1 (P,Q ; Y,R) = D(P, Y)- QD = 0

F2 (P,Q ; Y,R) =S(P, R)- QS = 0
D
ii) Now, given the equilibrium condition Q = QS ≡ Q, and using the
simultaneous-equation approach for the implicit, evaluate the effect of
an increase in the price of oil (R) on the quantity and price of the good
in the market. Show all the steps. (10 marks)

10
 D(P, Y)- QD = 0
S(P, R)- QS = 0

DP∗¿⋅dP+D ⋅dY−dQ=0 ¿SP∗¿⋅dP+S ⋅dR−dQ=0 ¿

Y R

DP∗¿⋅dP−dQ=−D ⋅dY ¿SP∗¿⋅dP−dQ=−S ⋅dR ¿

Y R
D P∗¿ ¿ −1 dP −D Y⋅dY
[ S P∗¿ ¿ −1 dQ
=
][ ] [
−S R⋅dR ]
Let dY=0, dR≠0

D P∗¿ ¿ −1
[ S P∗¿ ¿ −1
¿¿
]
D P∗¿ ¿ −1
[ S P∗¿ ¿ −1
¿¿
|J|=(−DP∗¿)−(− S
] ¿ ¿
P∗¿)

−D P∗¿+ S ¿
= P∗¿
¿

=(-)(-)+(+)
=(+)

[ J 1 ]= −S0 −1 |J 1|=0−(−1)(−S R )
[ R −1 ] = −S R
= (+) sign
D P∗¿ ¿ 0 |J 2|= ( D P∗¿ ) (−S
[
[ J 2 ]= S
P∗¿ ¿ −S R
] =
( DP∗¿)(−S
R
R

) ¿
)−0 ¿

=(-) sign
∂ P |J 1| ∂Q |J 2|
= =
∂ R |J| ∂ R |J|
SR (D S ¿¿¿
¿¿ P∗¿)
P∗¿)( ¿
−D P∗¿+S −D
P∗¿+S
= P∗¿ = P∗ ¿

11
 + −
= + = +
= (+) sign = (-) sign

An increase in the price of oil (R) will increase price of the good in the market.
An increase in the price of oil (R) will decrease quantity of the good in the market.

QUESTION ONE (16 MARKS) BEEQ2013 A172

Suppose that the demand and supply functions for 3-commodity markets are
numerically as follows:
Qd1 =23−5 P1 +P2 + P3 ; Qs1 =−8+6 P1
Qd2 =15+P1 −3 P2 +2 P3 ; Qs2 =−11+3 P2
Qd3 =19+P1 +2 P2 −4 P3 ; Qs3 =−5+3 P3

d s
where, Qi , Q i represent quantity demanded and quantity supplied for commodity

i. Similarly,
Pi represents, the price for commodity i.

a) The necessary condition for the solutions to exist has not been fulfilled, why?
(2 marks)

The necessary condition for the solutions to exist has not been fulfilled as
the total number of unknowns and the total number of the equations are
not equal. The set of prices Piare not corresponding quantities that all n
equations in the equilibrium condition.

b) Suggest way(s) how to solve the situation. (2

marks)
d s
Let Q1 ( P1 , P2 , P 3 )=Q1 ( P1 , P2 , P3 )=Q 1 ( P1 , P2 , P3 )
d s
Let Q2 ( P1 , P2 , P 3 )=Q2 ( P1 , P2 , P3 )=Q2 (P1 , P2 , P3 )
d s
Let Q3 ( P1 , P2 , P 3 )=Q 3 ( P1 , P2 , P3 )=Q3 (P 1 , P 2 , P3 )

c) Next, write the system obtained in b) into Ax = b form. (3 marks)

12
 d s d s
Q1 =Q 1 =Q 1 Q2 =Q 2 =Q 2

23−5 P1 +P 2 +P3 =−8+6 P1 15+P1 −3 P 2 +2 P3 =−11+3 P 2

23−5 P1 +P 2 +P3 +8−6 P1 =0 15+P1 −3 P 2 +2 P3 +11−3 P 2=0
11 P1−P 2−P3 =31 −P1 +6 P2 −2 P 3=26

Qd3 =Q3s =Q3

19+P1 +2 P2 −4 P3 =−5+3 P3
24+P1 +2 P2 −7 P3 =0
−P1 −2 P2 +7 P 3=24

A x= b

11 −1 −1 P 1 31

[ −1 −2 7 P ][ ] [ ]
−1 6 −2 P 2 = 26
3
24

d) Now, by using matrix inversion technique solve for the equilibrium of the
model.
(9 marks)
-1
x=A b

|A|=11[(6)(7)−(−2)(−2)]−(−1)[(−1)(7)−(−1)(−2)]+(−1)[(−1)(−2)−(−1)(6)]
= 11(38) +1(-9)-1(8)

= 401

1 T
(C )
-1
A = |A|

C=
+[(6)(7)−(−2)(−2)] −[(−1)(7)−(−2)(−1)] +[(−1)(−2)−(6)(−1)]

[ −[(−1)(7)−(−1)(−2)] +[(11)(7 )−(−1)(−1 )] −[(11)(−2 )−(−1)(−1)]

+[(−1)(−2)−(−1)(6) −[(11)(−2)−(−1)(−1)] +[(11)(6)−(−1)(−1 )] ]
13
 38 9 8

[
9 76 23
= 8 23 65
]
38 9 8

[
9 76 23
CT = 8 23 65
]

38 9 8 31 P1=4, P2=7, P3=6

x=
1
401 [
9 76 23 26
8 23 65 24 ][ ] Q1= -8+6P1
=−8+6(4 )
=16
1604

=
1
401
2807
2406 [ ] Q2 = -11+3P2
= -11+3(7)
= 10
4

=
[]
7
6
Q3= -5+3P3
= -5+3(6)
= 13
QUESTION TWO (36 MARKS) BEEQ 2013 A172
a) Given a national income model as follows:
Y=C+I0+G0 ( I0 ¿0, G0¿0)
C=C0+b(Y-T) (C0¿0, 0¿b¿1)
and T=T0 + tY (T0¿0, 0¿ t¿1)
where Y = income; C = consumption; C0, I0, G0, T0 are respectively, autonomous
consumption, autonomous investment, autonomous government expenditure, and
autonomous tax; b and t are coefficients. Solve for the equilibrium of Y, C and T of
the modal using the Cramer’s rule. (10
marks)
Y-C=I0+G0
-bY+C+bT= C0
-tY+ T=T0
14
 Ax=b

1 −1 0 Y I 0 + G0

[ −t 0 1 T ][ ] [ ]
−b 1 b C = C0
T0

|A|=1[(1)(1)−(0)(b)]−(−1)[(−b)(1)−(−t )(b)]+0
=1-b+bt

I 0 +G0 −1 0

[
[ A 1 ]= C 0
T0
1
0
b
1 ]
|A1|=(I 0 +G0 )[(1 )(1)−0 ]−(−1 )[(C 0 )(1)−(b )(T 0 )]−0

=
I 0 +G0 +C0 −bT 0

|A1|
Y=
|A|
I 0 + G 0 +C 0 −bT 0
= 1−b+bt
1 I 0 +G0 0

[
[ A 2 ]= −b C0
−t T 0
b
1 ]
|A2|=(1)[(C0 )(1 )−(b )(T 0 )]−( I 0 +G 0 )[(−b )(1)−(b )(−t )]−0

= C 0 −bT 0 +b( I 0 + G0 )+bt( I 0 +G0 )

|A |
C= 2
|A|
C 0 −bT 0 + bI 0 +bG 0 −btI 0 −btG 0
= 1−b+bt
1 −1 I 0 +G0

[
[ A 3 ]= −b 1 C 0
−t 0 T 0 ]
|A3|=1[(1 )(T 0 )−0 ]−(−1 )[(−b )(T 0 )−(C 0 )(−t )]+( I 0 +G0 )[ 0−(−t )(1)]

= T 0−bT 0 +tC 0 +t (I 0 +G 0 )
|A |
T= 3
|A|
T 0 −bT 0 + tC 0 + tI 0 + tG0
= 1−b+bt
15
 2 3
(x . y +2 y ). (x +xy )
Z=
b) i) Partially differentiate the function (2 x +2) with respect to
both x and y.
(5marks)

2 3
(x . y +2 y ). (x +xy )
Z=
(2 x +2)
x 3 y + x 3 y 4 +2 xy+ 2 xy 4
= ( 2 x +2 )
2 2 4 4 3 3 4 4
∂ Z [( 2 x +2 )(3 x y +3 x y + 2 y +2 y ) ]−[( x y + x y +2 xy +2 xy )( 2 )]
Z x= =
∂x ( 2 x+ 2)2
3 3 4 2 2 4 4 4
[ 6 x y +6 x y +6 x y +6 x y +4 xy + 4 xy +4 y +4 y ]
2
= ( 2 x +2)
3 3 4 4
[2 x y +2 x y + 4 xy +4 xy )]
- (2 x +2 )2

4 x 3 y +4 x3 y 4 + 6 x 2 y +6 x 2 y 4 +4 y+ 4 y 4
= ( 2 x +2)2
3 3 3 3 3 3 4 4
∂ Z [ ( 2 x +2)( x + 4 x y + 2 x +8 xy ) ]−[ ( x y + x y + 2 xy +2 xy )( 0 ) ]
Z y= =
∂y ( 2 x+ 2)2

x 3 + 4 x 3 y 3 + 2 x +8 xy 3
= 2 x +2

ii) Find the derivative of the implicit function of the form ln 2 y-

2x
ℓ +3 xy=0 .
(3marks)
2x
ln 2 y - ℓ +3 xy=0
F1 =−2 ℓ 2 x +3 y 1
F2 = +3 x
y

dy −F 1
=
dx F 2

16
 2 ℓ 2 x −3 y
1
+3 x
= y

c) Consider a general form of an IS-LM model expresses in implicit version as

follows:

where Y is national income, C is aggregate consumption, I is aggregate investment,

and r is the real interest rate, L is money demand, Go and Lo are exogenous
variables for government spending and money supply.

i) Take the total differential of each equation. (4

marks)

1⋅dY −CY⋅dY −I r⋅dr−1⋅dG0 =d (0)

LY⋅dY + Lr⋅dr−1⋅dL0 =d (0 )
(1−C Y )⋅dY −I r⋅dr =1⋅dG0
LY⋅dY +Lr⋅dr =1⋅dL0

ii) Form the differential equations obtained in i) in J x = b form. (3marks)

(1−C Y )⋅dY −I r⋅dr =1⋅dG 0
LY⋅dY +Lr⋅dr =1⋅dL0
Jx=b

∂ F1 ∂ F1 −∂ F 1

[ ][ ] [ ]
∂Y
∂ F2
∂Y
∂r dY
∂ F 2 dr
∂r
=
∂G0
−∂ F 2
∂ L0
⋅dG 0

⋅dL0

1−CY −I r dY
[ LY ][ ] [
Lr dr
=
(1 )⋅dG0
(1)⋅dL0 ]
17
iii) Compute the |J| and show that it is not zero (3
marks)
|J|=[( Lr )(1−C Y )−(LY )(−I r )]
=[(-)(+)-(+)(+)]
= (+ sign)¿ 0

iv) Compute the effect of a change in L 0 on both Y and r. (4

marks)

Let
dG0 =0 ; dL0 ≠0

∂Y 0

[ ][ ]
( 1)⋅
1−CY −I r ∂ L0 dL
[ LY Lr ] ∂r
∂ L0
=
dL
( 1)⋅ 0
dL0
0

∂Y

[ 1−CY
LY ][ ] [ ]
−I r
Lr
∂ L0
∂r
∂ L0
=
0
1

0 −I r ∂Y |J 1|
[ ]
[ J 1] = 1 Lr
=
∂ L0 |J|
|J 1| I r
|J 1|=[(0)( L)−(1)(−I r )]
=
|J| (L r )(1−CY )−( LY )(−I r )
= Ir
(−)
= (-) sign
= (+)
= (-) sign
1−C Y 0 ∂r |J 2|
[
[ J 2 ]= L
Y 1 ] =
∂ L0 |J|
|J 2| 1−CY
|J 2|=[(1−C )(1)−(0)( LY )]
=
|J| ( Lr )(1−C Y )−( LY )(−I r )
= 1-C
= (+) sign (+)
= (+)
= (+) sign

18
 iv) Explain your finding in iv). (4
marks)
The L0 has negative relationship with Y. When L 0 increases, Y
decreases. The L0 has positive relationship with r. When L0 increase, r
will increase.

QUESTION ONE (45 MARKS) BEEQ 2013 A181

A two-equation model below represents goods sector and monetary sector
equilibrium for a hypothetical economy:

𝐿0 > 0, 𝑓 > 0, 𝑔 < 0, 𝑒 > 0.

As usual, 𝑌 is aggregate income, 𝑟 is the interest rate, 𝐼0 is the autonomous

investment, and 𝐿0 is the level of money supply.

i) List down the endogenous variables and the exogenous variables of the
model. (2
marks)
Endogenous variables: Y, r
Exogenous variables: 𝐼0, 𝐿0
ii) Which equation represents the IS and which represents the LM? (2
marks)
I0 b L0 −e g
Y= + ⋅r Y= − ⋅r
1−c 1−c represents the IS ; f f represents the
LM.
iii) Justify your answers found in ii). (4
marks)

19
 I0 b
Y= +⋅r
1−c 1−c represents the IS as it shows negative relationship
between Y and r. Where b less than zero, it is negative, hence the gradient
for this equation is negative. When r increases, Y decreases.
L0 −e g
Y= − ⋅r
f f represents the LM as it shows positive relationship
between Y and r. Where g less than zero, it is negative, hence the gradient
for this equation is positive. When g increases, Y increases.
iv) Find the equilibrium of the economy. (6
marks)
I b L0 −e g
Y= 0 + ⋅r Y= − ⋅r
1−c 1−c f f
I0 b L −e g
+⋅r = 0 − ⋅r
1−c 1−c f f
I 0 + br L0 −e−gr
=
1−c f
fI 0 +bfr=L 0−e−gr −cL0 +ce +cgr
bfr+gr −cgr=L 0−e−cL0 +ce−fI 0
L −e−cL0 + ce−fI 0
r¿= 0
bf + g−cg
L0 −e
g L0 −e−cL0 + ce−fI 0
¿
Y =
f f
− (
bf + g−cg )
bfL0 + gL0 −cgL0 −bef −eg+ ceg−gL0 + eg+cgL0 −ceg+ fgI 0
= f ( bf + g−cg)
bfL0 −bef + fgI 0
= f ( bf + g−cg )
bL0 −bf + gI 0
= bf + g−cg

v) Suppose now, the monetary authority decides to increase the quantity of

money supply to a new level, evaluate the effect of such changes to the economy.
(8 mark)
¿
∂Y (bf +g−cg )(b )−(bL0 −bf +gI 0 )(0 )
= 2
∂ L0 (bf + g−cg )
(bf +g−cg )(b)
2
= ( bf +g−cg )
b
= bf +g−cg

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 (−)
=
(−)+(−)−(−)
=(+)sign
b
L0
An increase of one unit of will cause Y*increase bf +g−cg unit.
∂ r (bf +g−cg )(1−c )−( L0 −e−cL0 +ce−fI 0 )(0 )
¿
= 2
∂ L0 (bf + g−cg )
(bf + g−cg )(1−c )
= (bf + g−cg )2
1−c
= bf +g−cg
(+)
=
(−)+(−)−(−)
=(−)sign
1−c
L0
An increase of one unit of will cause r*decrease bf +g−cg unit.

vi) Now, rewrite the equation (1) and (2) respectively in their implicit-forms
equivalence. (2
marks)
I b L0 −e g
Y= 0 + ⋅r Y = − ⋅r
1−c 1−c f f
fY =L0 −e−gr
Y (1−c )=I 0 +br
F2 (Y ¿ , r ¿ ; I 0 , L 0 )=0
F1 (Y ¿ , r ¿ ; I 0 , L0 )=0
F2 =fY −L0 +e + gr=0
F1 =Y (1−c )−br −I 0=0

vii) Since, the solution in iv) above, shows that the equilibrium for the
economy does exist, now, apply the total differentiation to each of the two
equations just found in vi).
(4 marks)

F1 =(1−c )⋅dY ¿ +(−b )⋅dr ¿ +(−1)⋅dI 0 =d (0 )

F2 =f⋅dY ¿ + g⋅dr ¿ +(−1)⋅dL0 =d (0 )
F1 =(1−c )⋅dY ¿−b⋅dr ¿ =(1 )⋅dI 0
F2 =f⋅dY ¿ + g⋅dr ¿ =(1 )⋅dL0

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viii) Rewrite the finding in vii) in the 𝐽𝑥 = 𝑏 form. (2 marks)
J x= b
∂ F1 ∂ F1 ∂ F1

[ ][ ] [ ]
∂Y
¿

∂ F2
∂Y
¿
∂r
¿

∂ F2
∂r
¿
¿
dY
dr
¿

¿ =
−

−
∂ I0
∂ F2
∂ L0
⋅dI 0

⋅dL0

1−c −b dY
[ f g dr ¿ =
(1)⋅dI 0
][ ]
(1)⋅dL0 [ ]
ix) Next, like what you did in v) above, evaluate the effect of a change (in
particular an increase) in the quantity of money supply to the economy.
(10
marks)
Let d I 0 = 0 ; d L0 ≠ 0
∂Y ¿ 0

[ ][ ]
(1)⋅
∂ L0 dL0
[1−cf −b
g ] ∂r ¿
=
(1)⋅
dL0
∂ L0 dL0
¿
∂Y

[ 1−c −b ∂ L0
f g ∂r
¿
=
0
1 ][ ] [ ]
∂ L0

|J|=( g)(1−c)−(−b)( f )
=(−)(+)−(+)(+)
=(−)sign

[ J 1 ]= 01 −b ∂Y |J 1|
¿

[ g ] =
∂ L0 |J|
|J 1|=(0)( g)−(1)(−b) |J 1| b
=
=b |J| g−cg+bf
=(−sign) (−)
=
(−)
=(+)sign

[ J 2 ]= 1−c0 ∂ r |J 2|
¿

[ f 1 ] =
∂ L0 |J|
|J 2|=(1−c)(1)−(0)(f ) |J 2| 1−c
=
=1−c |J| g−cg+bf
=(+sign ) (+)
=
(−)
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 =(−)sign
b
L0
An increase of one unit of will cause Y*increase bf +g−cg unit.
1−c
L0
An increase of one unit of will cause r*decrease bf +g−cg unit.

x) Provide some comments on your findings in both ix) and v). (5

marks)
¿
∂Y
= b
The answer in ix) and v) are same where ∂ L 0 bf +g−cg ;
¿
∂r 1−c
=
∂ L0 bf +g−cg . Hence, the derivatives of implisit function and
derivatives of explisit function will get the same answer with same model.

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